“It is almost impossible to do well in equities over time if you go to bed every night thinking about the price of them.”
– Warren Buffet
The Stock Market is Plunging!
If you turned on your TV this week and tuned the channel to CNBC, you likely had your fill of the terms “plunging,” “tumbling,” and “plummeting”, which were being used to describe the equity prices of America’s great companies.
As the financial media has so gleefully reported in hyperbolic terms this week, equity prices have had a tough stretch since the calendar flipped to October, and this past week was particularly volatile. As of the market close on October 11, the S&P 500 had declined by 6.7 percent since October 1, and it was down by 5.4 percent in just this week alone!
It is no wonder that investors everywhere are feeling nervous and agitated and appear convinced that the bull market enjoyed by equities since 2009 is now in serious jeopardy of ending.
Just the Facts
As we have written about many times in the past, we at Concentus are students of capital market history, and we believe that the only way to execute a successful investment plan over time is to base your decisions on facts. So, here’s what we recommend that you remember at a time like this. To start, stock prices are inherently and frequently volatile. Although every stock market correction feels unique – this time is different! – that is not typically the case. Here are the facts:
- Over the last century, equity prices have corrected by 10 percent or worse an average of once every single year. The average annual decline has been 13.5 percent.
- On Wednesday of this week, the S&P 500 fell by 3.29 percent, which scared many investors because it seemed like such a huge and unprecedented single-day loss. In fact, since 1928, there have been 325 individual trading days in which the stock market declined by 3 percent or worse, which is an average of about 3.5 times per year over the last 90 years.
Despite the frequent occurrence of extreme volatility in company equity prices, patient investors who have had the discipline to ride out these temporary pullbacks have been handsomely rewarded. The S&P 500 traded for 13.6 at one point in the year 1946, and today it is trading right around 2,762. That is a return of 203x your money, not counting dividends, and equates to an average annual return of just about 10 percent per year over the last 90 years.
The takeaway? Declines in stock prices happen all the time, and they are only temporary. Increases in values and dividends are permanent. These periodic declines should be viewed as “stocks on sale” and buying opportunities.
Unfortunately, in the war between facts and feelings, facts always lose.
Despite the facts explained above, it is still completely natural to experience feelings of fear in the face of a decline in stock prices like we have experienced this week. Even the most seasoned and experienced investor will take notice when their portfolio drops by 5 percent in a single week and will naturally be tempted to think that this is the beginning of something much worse.
It is okay to feel the fear, everyone does. The difference between the great investors and everyone else is that great investors don’t act on their fears. In the words of author Nick Murray, “Declines like this are so common, we knew this would happen. A market correction is an episode during which common stocks are returned to their rightful owners. This is our time.”
Looking for more facts about stock market volatility to ease your fears? Find them here.